NOW JOBS, JOBS, JOBS! Oh, and universal voter registration would be nice. I think a little government “healthcare bill education” would go over pretty well too. How about citizenship processing fee waivers (stimulus, you know)? Oh, and let’s purge the voter rolls of names on possible terrorist lists (after populating them with KKK and Bircher and Tea party and militia names). Free college tuition for disadvantaged minorities and single mothers. After all, we wouldn’t want them to end up on (gasp) welfare. Start drafting corporations for the war effort (after all, those free speech rights can’t come without responsibilities). I’d gladly trade unfettered free speech by Halliburton for free contracting services. heh-heh.

I’m proud as punch–My Dad’s tiny electrical contracting outfit (Pedersen Electrical Maintenance) has completed 3 unique photovoltaic projects — our first ever–since the 1st of the year. I’m pleased to note that our entry to this field was at my instigation!

Project #1 : 120kw DC with 100KW inverter on a small industrial building with a 600A 120/208V service entrance.

What makes the project unique? Combining 22 separate 100A services in a single new 600A panel, with an integrated 400A lockable, visibly open disconnect switch and PV output metering in the new 3-section main panel. Mechanical reinforcement of the building structure to accomodate the increased roof loading. One year project payback to customer. Fat check for Dad … and an opportunity to learn something new.

Project #2

14kw Residential PV.

What makes this project unique? PV and solar themal at the same time. Installation on house with tile roof. Installation in house with steel framing. Installation actually reduces roof loading by removing tile, installing asphalt shingles (underlay already needed redone), installing PV and solar thermal, and restoring tile on all portions of roof without panels. This also reduces panel profile (roof is pitched perfectly for panel installation flush on south face). Battery backup system included, Automatic transfer switch and emergency gas genset included (Sunny Boy inverters and Sunny Island system were used to incorporate these features). This is a gee-wow project, not an investment.

Project #3

Residential 6kw PV

House already had solar thermal (since the 70’s). Roof layout creates potential mismatched array (small south facing roof, large west facing roof on front of house). Mismatched panels used. Design used 29 (200W) microinverters…one for each panel, to allow each panel to operate at MPP, despite mismatches. One year project payback with incentives.

Yep, I’m an idiot…TOO.
BTW… I’m sure I’ll exhibit my posterior regularly here, while I have freshman college credit in Econ, I’ve successfully avoided ever taking a class (even in high school). Given that Ed Prescott runs the Econ dept at my alma mater, that probably leaves me better educated than the alternative, yet still woefully ill-informed, no doubt. I welcome correction.

Jim Hamilton-Brad Delong

From comments on a post by Jim Hamilton on his Econbrowser (http://www.econbrowser.com) regarding the “Cash for Appliances” program:

JDH said: “I remain deeply skeptical that junking working capital in this fashion is the best way to grow Americans’ wealth. …. Destroying durable goods in order to build new ones goes beyond even this [burying cash to employ folks in digging it up] colorful recommendation from Keynes.”

“JUNKING WORKING CAPITAL” I’m really getting sick of hearing this from economists. I understand having to explain to a grandma who grew up in the depression why “use-it-up and wear-it-out,” while often an admirable economic strategy, is not invariably one’s best option from a cost-benefit standpoint. I don’t understand the seeming inability of Econ PhD’s to grant the same point.

This is no more nor less than the sunk-cost fallacy being propagated by the excellent Hamilton…I’m guessing some political blinkers are operative here.

The 23W CFL uses $2.67 electricity in 1000hours, the lamp cost $2 and the throw-away incandescent cost 40 cents for a total of $5.07 cents for 1000 hours light compared to $11.60 for 1000 hours from the “free” brand new lightbulb. I have removed the lifetime advantages from the CFL to make the argument clearer. Thus you save $6.53 by “JUNKING WORKING CAPITAL.”

While the analysis for junking a working refrigerator is “not clearly positive NPV” as Kevin T. quite fairly puts it, the light bulb example CLEARLY shows that the knee-jerk horror many of us have of throwing away something which “ain’t broke” and the constant invocation of “broken windows” or “JUNKING WORKING CAPITAL” is unfair, as replacement of working but obsolescent equipment with more cost-efficient equipment is clearly NOT broken windows, just because both pieces of equipment happen to be termed “refrigerators.”

Delong also misapplied (less egregiously) Bastiat to Cash for Clunkers.

Ted Gayer-John Whitehead

Ted Gayer claims your self-employed newspaper boy is better able to calculate the cost-benefit of energy efficiency investment than engineers or economists, and what is more has already done the calculation and made all cost-effective investments. John Whitehead defends this nonsense.

After all, Gayer says, “This finding violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits.”

Yes, that’s right boys and girls–market inefficiency violates the basic principles of economics! I don’t know the man, but I’m somewhat disinclined to give him much benefit of the doubt given his final paragraph mocking the idea that subject-matter-experts know more than Joe Schmoe, CEO by invoking the strawman that experts must know more than Joe about information not available to the experts about his firm.

Yes, wait for it, he invokes IMPERFECT INFORMATION to dismiss the market inefficiency largely CAUSED by IMPERFECT INFORMATION with respect to technical knowledge of energy efficiency opportunities. His argument is of the form: If A knows something B does not, B must not know anything A does not. The correct response to this in elementary school was “HUH?” Even better, he ignores the agency problem which causes much of the remainder of the energy gap, to invoke the canard that either negative cost investments do not exist or energy efficiency experts must not know much about cost-effective energy efficiency investment, otherwise they’d be rich from investing in all the negative cost investments available. This has even less validity than the classic judging of economists by their personal stock-market returns. After all, the economists at least have access to the stock market.

Gayer: “The fourth possible reason for the negative cost finding is that firms do indeed irrationally forego profit-maximizing activities, or they are ignorant of such activities. Economics takes the profit-maximizing motive as a premise. This assumption, like all economic assumptions, is used to simplify the complex economic world in order to make manageable inferences. It is an approximation of reality, not a physical law met with certainty. But to assume that negative cost opportunities exist because firms are irrational, people must also assume that the analysts who identify negative costs are more knowledgeable about profit-making activities than the firms. They must also assume that firms continue in their irrationality even after the analysts show them that profit-making opportunities exist. Finally, they would wonder why the analysts don’t act on their superior information and rationality and reap all the negative costs they have identified.”

“I thus still hold with Gayer’s 4th possibility (the one HE mocks). This is that analysts and energy professionals DO know more about the private cost-benefit of energy efficiency investment than Joe Schmoe, CEO, that investments of positive NPV with rational discount rates ARE available to Schmoe, that Schmoe DOES decline to fully believe this when engineers, analysts, and electricians explain it to him, and that this makes Schmoe your average moron (I’ve met him personally, any number of times). ….

2/3rds of houses with thermostats don’t have a programmable one. That’s about 60M households who either think that it isn’t worth the money OR have some non-economic reason for not making this investment (Hmmmm???). Perhaps they overestimate their ability to manually control the thermostat? Or perhaps it’s a hassle that they don’t really have time to think about? According to Energy Star a programmable thermostat saves the typical household $180/yr. You can buy a basic programmable thermostat for under $30 (you’d have to try hard to spend $100) and put it in yourself in 15 minutes (or pay a handyman less than $50 if you are completely incapable of any manual/mechanical activity). So, less than a 1 year payback. Let’s review: 2/3rds of households have made an incorrect economic choice about whether to install an energy efficiency measure with a less than 1 year simple payback (600% annual tax-free return if you get your 6 y.o. kid to put it in for free). What makes you think they’re doing any better with the hard stuff?” …

“I’m not defending the specifics of a McKinsey report, or McKinsey, or the idea that a general model is more accurate at a detailed level than case-specific detailed analysis (though models ARE suggestive of the fact that such detailed analysis is rarely actually done). I AM defending the idea that market inefficiencies exist, specifically in the market for energy efficiency upgrades, creating an energy ‘gap’. Do you really want to attempt to defend the idea that ‘if it made rational economic sense it would already have been done?’ The inefficiencies in the energy efficiency market, in my detailed personal experience, generally relate to: A)incomplete information as to potential efficiencies by decision makers, B)An excessive risk premium placed on simple and sound energy investments by decision-makers who lack a high-school level understanding of the underlying physics on which to differentiate between snake-oil and science, C)market structure under which investment costs and benefits are decoupled (landlord-tenant relationships).

McKinsey report flaws

To be fair–the McKinsey report has issues, too.

BTW, having now read the whole McKinsey report, I want to reiterate that I am not setting myself up as a defender of the details of the report (which I consider indicative rather than prescriptive), only of the premise that significant unexploited strongly positive NPV energy efficiency investments exist in the private sector.

The assumptions made in the report are made largely to avoid charges of optimism bias.

For instance, it is assumed that not a single household adds a programmable thermostat not just in the reference case, but in the “high-range” abatement case. After all, not over-heating/cooling your McMansion while at work would be a “consumer utility reduction” (of the consumer’s bill, yeah).

For instance, the baseline projection for power generation construction by McKinsey in the 2 y.o. report was the highly politicized Bush-era DOE 2007 Annual Energy Outlook reference case(which projected only 17GW of net capacity of all renewable electricity generation to be constructed from 2005-2030, accompanied by massive levels of pulverized coal plant construction). This is what’s known in the reality-based community as DCWD. In the reality of the intervening 2 years, the U.S. has constructed more renewable generation than this ‘baseline’ predicted over the next 25. It was further assumed no incentives were provided for renewable construction (PTC had driven strong wind construction in 5 of the preceding 7 years). In fact, when the report was published near the end of 2007, new wind turbines constructed in 2006 and 2007 had already reached 45% of that 25 year baseline “projection” for all renewables and had been 35% of new generation capacity added in 2007.

The economists assure us: electrical generation is not a natural monopoly. To this I say: “HA!”

The grid (wires) is an acknowledged natural monopoly; the operation of generation is not separable from the operation of the grid. Where you build generation matters. The process by which generation siting proposals are made under the competitive framework is decoupled from the needs of the grid.

When I study yet another zombie (stupid, won’t die) generation project conceived with no understanding of the actual electrical system’s needs and fated to end stillborn in (both thru and despite) the diligent labors of a multitude of the scarce, skilled, and scarce-skilled, it seems clear: This is no way to run a railroad. The ineffectually windmilling arms of the proponents and reviewers of each project are generating much heat but little light. The end result of all this misallocated expenditure? Higher power prices for U.S. consumers, and lower productivity for the industry. No doubt this will be seen as proof of the inappropriately depressed prices extant in U.S. regulated utility markets by the true believers in the miracle of competition, or proof of how the deregulated market is insufficiently de-regulated. All I can say to that is: “HA!”

While I cannot demonstrate as much, the studies which purport to show that generation is not a natural monopoly MUST incompletely capture the costs imposed both on the grid and grid owners, and on the generators by the increased risk premium of merchant generation.

A simple argument: A cost-efficient electrical grid will have only a barely adequate quantity of generation associated with it. This is often confused by the presence of generating reserves necessary to meet technical contingencies. What this means, in short, is that on day 1 in a de-regulated market, the potential for market power exists for any generator owner. The extent of this market power may be obscured in the short term by favorable circumstances, but scarcity rents will be available to existing plant owners. However, physical arbitrage against such rent will not be profitable as the marginal price of new generation will be substantially higher than for existing generation. Thus, assuming growing demand for electricity…the price of power rises. To the market lover, this must seem all well and good. Should not the plant owner receive the full price the market may bear, not simply the cost plus a regulated profit? Well, that isn’t how de-regulation was sold. More competition, we were and are told, MUST lead to LOWER prices. Instead, it leads inexorably to higher average prices.

Residential and commercial rates are up even more than industrial, Tim.

This (higher prices) is a result of many factors. Here are a couple: The price of capital is a major part of the price of generation. The cost of capital is directly associated with risk. If you build a regulated power plant, you are guaranteed a rate of return. The corresponding cost of capital is low. If you build or buy a merchant generating plant, you are NOT guaranteed a rate of return. The corresponding cost of capital is higher, therefore, the price of power is higher.

If you run a vertically integrated utility with an obligation to serve load, the downside to shutting down a plant on the hottest day of the year is very high, you have abrogated your obligation and are likely to be subject to investigation, fine, and tinkering with your returns. Further, your operation is entirely transparent, information abounds to show whether this was an appropriate decision. Further, your price of power is fixed and does not increase with scarcity. When backup widget A fails, the CEO tells you to keep the plant on for another hour to get thru peak (“that’s why we have a backup”)

If you run a fleet of merchant plants, you have pricing power on the hottest day of the year, and you have no reason NOT to shut down the plant when backup widget A goes out of service. No one knows whether you should or should not have shut down the plant because you have no obligation to show, produce or publish records about the internal operation of your plant.

If you are a vertically integrated electric utility without gas production holdings, it is to your advantage to manage the cost of your gas supply on behalf of your electric customers. A dollar passed thru to a gas supplier is a dollar the PUC won’t let you earn on another part of your system.

If you are a gas/oil company that bought up merchant power plants, a dollar additional in gas fuel costs is a dollar of additional profit under the corporate umbrella.

If a power plant is 30 years old and owned by a regulated utility, the plant is paid for. The ratepayers are reaping the rewards of having guaranteed the payments on the plant over the past 30 years.

If a plant is 30 years old and owned by a merchant generator, the plant WAS paid for, but the OWNERS are continuing to receive a full “market rate” (including the cost of building an alternative plant) for that power, rather than simply being paid their operating costs + a small profit.

Smart People behind deregulation DIDNT think it would reduce rates, they thought it would improve profitability of generators.

Available generation supply in a regulated market.
The engineers who determine when to build another generation plant at a vertically integrated utility only build plants which are physically needed to meet physical demand at existing retail prices. This is sometimes confused by the discussion of various types of generation “reserves.” However, these reserves are required by physical factors. They are NOT excess supply.

Now turn all of that generation into market generation. You have a situation in which supply equals demand at the existing retail price. On day 1, every generator has market power. This market power grows each year as demand increases. Without spending a dime, the price point will increase. Because existing prices are based on the average cost of regulated generation, including fully amortized plants and no-risk interest rates, these prices are lower than the cost of new merchant generation. However, given weather variation and the presence of physical reserves, both of these factors (market power and disencentive for new generation) may be masked for a few years.

The last time I cried for someone I’d never met in person was when Molly Ivins died. Good company, that.

I never met Tanta, and am yet another (non-)random stranger she enlightened, instructed, and entertained, as we interacted assymetrically on this strange thing we call an internet.

To the extent that we are our ideas, I knew Tanta, as did you all. We knew, not her face, nor even the whole shape of her mind, but her mind in profile. She is beautiful. Her passing is not yet real. A light–of reason, and truth, and justice, and humor–has gone out of the world. Yet something so vibrant cannot simply be extinguished. She glows yet, reflected in the mind’s eye of a thousand strangers who say, each and all, “I knew her. She was my friend. She was beautiful. I loved her.”

This blog is primarily self-referential. It may or may not contain: aimless musings on such riveting topics as cross my scattered brain at any given moment, or links to whatever catches my fancy as I meander across the web, or verbatim copies of my posts on other sites, or over the top ranting on the latest indignity inflicted on me or the world (other than my own posts). The blog title has multiple meanings to me and there will likely be a post on that at some point.

All in all, the only thing likely to be consistent across all my posts is: they will be: “Not of General Interest” which is one of half-a-dozen blog names I considered prior to this one but found to already have been taken.

Thanks, and if you made it here somehow, it was probably a mistake. You are welcome, but don’t expect me to leave the light on.